Nonparametric Finance

Chapter 2Financial Instruments

The basic assets which are traded in financial markets include stocks and bonds. A large part of financial markets consists of trading with derivative assets, like futures and options, whose prices are derived from the prices of the basic assets. Stock indexes can be considered as derivative assets, since the price of a stock index is a linear combination of the prices of the underlying stocks. A stock index is a more simple derivative asset than an option, whose terminal price is a nonlinear function of the price of the underlying stock.

In addition, we describe in this section the data sets which are used throughout the book to illustrate the methods.

2.1 Stocks

Stocks are securities representing an ownership in a corporation. The owner of a stock has a limited liability. The limited liability implies that the price of a stock is always nonnegative, so that the price of a stock at time satisfies

Stock issuing companies have a variety of legal forms depending on the country of domicile of the company.¹ Common stock typically gives voting rights in company decisions, whereas preferred stock does not typically give voting rights, but the owners of ...